Indian rupee recently depreciated to a new record low against US dollar, the rupee depreciation brings about a large change in economy. The fluctuations in Indian currency resulted in huge setback to Importers and Foreign Investors and good news for exporters. As rupee depreciates, the basic impact of it is noticed and felt on Import bill, Fiscal Slippage, Cost of Borrowing. Indian currency Exchange rate is based on domestic market conditions.
The main reason for the current Indian rupee depreciation:
It is fundamentally because of the ongoing European crisis linked with crisis in domestic economy. Due to the current crisis in Europe, big banks, investors and financial institutions started selling euro and bought dollar, thus dollar appreciated against all major currencies including rupee. Domestic economy adds fuel to this crisis due to stagnant economic reforms and increasing current and fiscal deficits to the economy.
Impact on Growth rate of India:
In the last few weeks, the fall in Indian Rupee against the US dollar disappointed not only Indian Economy but also many importer and foreign investors. The fluctuation in the rupee affects the share market also, due to which foreign investors stay away from Indian Stocks. The Indian rupee was under attack when it touched a record low of above 65 to the US dollar. The Indian currency fell more than 27 per cent against the dollar. Such violation in currency creates huge obstacles for the economy. The GDP growth rate computes the rise in financial worth of the goods and services which is generated by an economy. Indian economy is considered as one of the fastest growing world economy. The depreciation of Indian rupee has affected the growth of Indian economy. The GDP growth of India has reduced to around 5% for the full fiscal. The reason behind such growth is India’s drowsing fiscal deficit, inflation and high interest rates. The GDP growth was high between 2003 and 2007 ie 9% which was driven by private investment. As GDP of the economy does not grow, as a result foreign investors are also not attracted towards it. Because such conditions give rise to high volatile investing condition which are highly risky for investors. Thus foreign investors avoid investments due to highly risky conditions which would end up in loss.
Negative Impact on Indian Economy:
The depreciation of Indian rupee leads to high Inflation and has great impact on imports, as India imports about 80% of its crude oil and the payment of these imports will be in terms of Indian currency. If rupee still continues to fall, then oil companies will be compelled to increase the fuel prices in order to compensate their loss. Thus the price of crude oil rises and making it much costlier which means importers will have to shed more to import same quantity of Crude Oil. This means higher the imports will result increase in fiscal deficit and would give rise to inflation, which is already a big problem for the Government. As India is under tremendous pressure of inflation and depreciation of Indian rupee makes it more difficult for Indian economy to grow. The higher import bills give rise to fiscal deficit and generate more problems for the Government. India imports products such as petroleum products, capital goods, chemicals, dyes, plastics, pharmaceuticals, iron and steel, uncut precious stones, fertilizers, pulp paper etc. Thus the price of these commodities rises as rupee falls. India will also have to make more payment in terms of rupee for obtaining their raw materials, in spite of drop in prices of global commodity due to depreciating of rupee against dollar. Oil companies already have noted the descent in the value of Indian rupee against the dollar which led them to increase prices of petrol. Not only oil but all other products and commodities are also very costly to import.
Who is gaining from this?
Depreciation of Indian rupee makes exports cheaper, which is a beneficial for Industries like IT, textiles, hotels and tourism through which they generate their income mainly from exporting their products or services. IT sector in India is under the influence of foreign clients through which IT companies earn most of their income and revenue. The tenure of the contract and cost of the project is decided in advance when an IT company receives a project from the client which is mostly priced in US dollar.
The impact of weak currency and rising Oil prices on Common Man:
The impact of such weak rupee is that it affects not only every sector but also Individuals in the country. Everything becomes costly, since our economy runs on oil so increase in oil prices raises price of every necessary thing, started from travelling to food items to, steel prices, everything that runs on oil. Inflation will reach another height and so is cost of living. Travelling abroad becomes very costly which includes travelling expense, hotel expense, etc can hike up by 15%. Students studying abroad for higher education are also affected as they have to pay more course fees, travelling, accommodation, etc. Imported electronic items and services also become expensive.